- At the Federal Reserve Bank of Kansas City’s Jackson Hole Economic Symposium, Fed Chair Kevin Warsh delivered speech, titled In Our Time.
- The speech touched on many of the key themes Chair Warsh has previously cited: the economy remains resilient, the labor market is near full employment, but inflation progress remains insufficient.
- On inflation, Warsh referred to recent readings as “better than expected” but have not necessarily shown that underlying trends have improved – a hawkish statement. The Chairman cited that over the last six-months, 49% of goods and services included in the PCE price basket are still running above 3% – well above the pre-pandemic average.
- Importantly, the Chair seemed to “clean up” some of his language following the July FOMC press conference. He reiterated the Fed’s mandate of targeting 2% PCE inflation and emphasized the importance of changes in underlying inflation measures – which he seems to favor using price distribution measures to gauge.
- There was no update provided on the five task forces’ work, other than the Chairman saying he has been “encouraged” with the progress made… so stay tuned at that front.
Key Implications
- Overall, this was a hawkish speech. While Warsh didn’t provide explicit forward guidance, his reference to “underlying inflation trends not showing any improvement in recent months” was a hawkish signal. We’ll still get one more CPI print before the next FOMC meeting, but based on today’s comments, a lot will be riding on that report. Clearly, the Fed’s reaction function has become asymmetric: it’ll only take one hotter reading to trigger tightening.
- Treasury yields rose as Chair Warsh spoke, with the two-year up 7.5 basis points to 4.3%. Fed futures are now pricing a 55% chance that the Fed hikes in September, with 35 bps of tightening priced by year-end. We view current pricing as appropriate given the asymmetric risks.
